AI borrowing binge prompts investors to back away from corporate bonds

Economic

Summary:

A surge in AI-related corporate borrowing and stress in private credit is making investors pull back from investment-grade bonds, warning spreads are too tight and vulnerable if economic data weakens or funding costs rise.

A big tech borrowing bonanza and signs of strain in private credit are spooking bond market lenders to the world's top-rated businesses, in a trend that could jolt funding costs higher, hit corporate earnings and add stress to twitchy global markets.

A cross-market rout sparked by AI over-investment nerves and what delayed U.S. data might mean for monetary policy has pushed world stocks down 3% this month and knocked everything from cryptocurrency bitcoin to gold (.XAU). But investment-grade bonds, which still offer borrowers the cheapest funding costs seen in decades, have been spared.

Investors at groups managing more than $10 trillion of client assets combined, however, expressed concerns about IG debt pricing or said they were reducing exposure to top-rated bonds, with some also having sold out of or begun actively betting against the asset class.

After JPMorgan boss Jamie Dimon warned last month about "cockroaches" emerging in credit markets, tech giants began borrowing heavily to fund their rush to build AI data centres.

Alternative asset BWL.N> sent waves of anxiety through the $3 trillion private credit market by moving to limit fund withdrawals, and IG debt was still not pricing enough risk, money managers said.

"There's fear in markets, and everyone's looking for the next shoe to drop," said Brian Kloss, portfolio manager at Brandywine Global in Philadelphia, a unit of Franklin Templeton, which runs $1.2 trillion of assets, and has an overall cautious stance on credit.

That could well be IG debt, Kloss said, meaning he was "taking profits" on existing holdings.

An ICE-BofA index tracking what top-rated U.S. companies pay to borrow over governments is trading just 10 basis points (bps) above 27-year lows of 74 bps touched in early October (.MERC0A0). The equivalent so-called spread in Europe is around 84, up slightly from 75 in late October (.MERPE00).

Salman Ahmed, global head of macro and strategic asset allocation at Fidelity International, had a short position against IG debt because pricing was too rich and an economic downturn might bring a "proper blowout".

Because prices had far to fall, he added, IG credit offered the most "bang for buck" in terms of hedging strategies that would pay out if a sustained economic downturn took hold.

AI borrowing binge prompts investors to back away from corporate bonds_1

Premium high-yield and investment grade US businesses pay to borrow over government rates reflects optimism about economic growth and demand for debt.

FEEDBACK LOOP

Credit spreads are a leading indicator for economic growth and stock market performance because funding costs affect businesses' profits, share prices and expansion plans.

"There's a feedback loop," said John Stopford, head of multi-asset income at asset manager Ninety One, adding he had dropped his funds' credit exposure to zero in recent weeks.

Interest rates on newly issued bonds would get more expensive, he said, if cash drained out of private credit funds while an AI borrowing bonanza ramped up.

"If the cost of borrowing goes up in private credit and there is lots of new issuance coming out, borrowers are going to have to pay up," he said. "And if it's more expensive for businesses to borrow they are going to make less money."

AI borrowing binge prompts investors to back away from corporate bonds_2

A chart showing year-to-date share-price performance for Blue Owl versus peers and the S&P BDC Index

After $75 billion of U.S. investment grade debt issued by AI-focused Big Tech hit the market in September and October the cost of five-year credit default swaps insuring against tech group Oracle defaulting has risen 44% in a month to 87 bps, Refinitiv data showed.

Meanwhile, investors have begun moving away from private debt funds as their lending standards come under scrutiny from regulators.

INVESTORS SEE DELAYED US DATA AS RISK FOR CREDIT MARKETS

David Furey, State Street Investment Management's head of fixed income portfolio strategy, said the world's fourth-biggest asset manager was staying invested in corporate credit for now but keeping a "close eye" for signs of U.S. economic weakness. IG credit pricing, he cautioned, had "very little cushion baked in" for economic deterioration.

AI borrowing binge prompts investors to back away from corporate bonds_3

Credit default swap values have more than doubled since September

Jonathan Manning, credit portfolio manager at Europe's largest asset manager Amundi, said he was also "looking to lighten up a little bit" on IG credit because of high pricing and in case delayed U.S. data such as Thursday's September jobs report increased volatility in a market that has traded calmly through selloffs so far.

Clients of Russell Investments, which advises institutions stewarding more than $900 billion between them, were also turning more cautious on IG credit.

"It's not so much that this is the asset class that they are most worried about. It's the asset class that's got very expensive so the upside isn't really there anymore," said Russell's global head of fixed income and FX solutions Van Luu.

Source: reuters

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Samantha Luan

Political

Economic

Mexican President Claudia Sheinbaum has again sought to stand up to President Donald Trump, on Tuesday repeating her rejection of any possibility of US military intervention against cartels on sovereign Mexican soil.

Trump has recently floated openness toward the possibility, and also Colombia, in exchanges with reporters related to the military build-up off Venezuela. "It's not going to happen," Sheinbaum said, according to The Associated Press. "He (Trump) has suggested it on various occasions, or he has said, 'we offer you a United States military intervention in Mexico, whatever you need to fight the criminal groups.'"

Trump had been asked asked on Monday if he would seek the Mexican government's permission before launching any potential strikes and responded that he "wouldn't answer that question." He added that he has been "speaking" with Mexico and that they "know how I stand."

That exchange had started as follows:

Speaking to reporters in the Oval Office, Trump answered a question about potentially striking Mexico or sending American troops or other personnel into the country by saying it would be "OK with me."

"Would I launch strikes in Mexico to stop drugs? OK with me, whatever we have to do to stop drugs. Mexico is — look, I looked at Mexico City over the weekend. There's some big problems over there," Trump said after he was asked whether he was considering such action.

The military campaign ongoing in the southern Caribbean and off Latin America is called "Operation Southern Spear," per a prior announcement from Pentagon chief Pete Hegseth.

"We've stopped the waterways, but we know every route. We know every route, we know the addresses of every drug lord," Trump had additionally explained.

"We know their address, we know their front door. We know everything about every one of them. They're killing our people. That's like a war. Would I do it? I'd be proud to."

The question of US military action south of the border is not a completely 'new' one; however, Operation Southern Spear marks the first time in history that the Pentagon has parked this many US naval assets, including a carrier group, just off Latin America. It's making leaders in the region very nervous, to say the least.

Source: Zero Hedge

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Adam

Economic

NFP Key Points

NFP report expectations: +50K jobs, +0.3% m/m earnings, unemployment at 4.3%.

Leading indicators point to a potentially above-expected reading in this month’s NFP report, with headline job growth potentially coming in somewhere in the 50-100K range

When is the September NFP Report?

The September NFP report will be released on Thursday, November 20, at 8:30 ET.

NFP Report Expectations

Traders and economists expect today’s NFP report to show that the US created 50K net new jobs, with average hourly earnings rising 0.3% m/m (3.7% y/y) and the U3 unemployment rate holding steady at 4.3%.

NFP Overview

We’re back (sort of)!

After the longest government shutdown in history, the intrepid folks at the Bureau of Labor Statistics (BLS) are back at work to deliver the SEPTEMBER version of the monthly jobs report. As the table below shows, economists believe the US labor market extended its “low hire, low fire” regime in September:

NFP Preview: Delayed September Data Could Still Tilt the Fed’s Decision_1

With reporting still ambiguous about whether we will ever see the October jobs report (my guess is no), this could be one of the last readings we see on the labor market before the FOMC meets for the final time of the year to make a tough decision on whether to cut interest rates next month.

With traders currently pricing in coinflip odds of another Fed rate in December, the stage is set for a potentially volatile reaction to the release (although the December jobs report should still carry more weight as a more timely reading).

NFP Forecast

As regular readers know, we focus on four historically reliable leading indicators to help handicap each month’s NFP report, but given the government shutdown, we don’t have access to the most relevant initial jobless claims reports this month:

The ISM Services Employment subindex ticked up to 47.2 from last month’s 46.6 print.

The ISM Manufacturing Employment subindex also rose slightly to 46.0 from last month’s 45.3 reading.

The ADP Employment report fell by -29K jobs, down from last month’s downwardly-revised -3K reading.

Weighing the data and our internal models, the leading indicators point to a potentially above-expected reading in this month’s NFP report, with headline job growth potentially coming in somewhere in the 50-100K range, albeit with a big band of uncertainty given the limited dataset.

Regardless, the month-to-month fluctuations in this report are notoriously difficult to predict, so we wouldn’t put too much stock into any forecasts (including ours). As always, the other aspects of the release, including the closely-watched average hourly earnings figure and unemployment rate, will also impact how markets react to the release.

Potential NFP Market Reaction

Technically speaking, the US dollar is near the middle of its recent ranges against most of its major rivals, leaving a neutral balance of risks headed into the release.

Source: investing

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James Whitman

Economic

● Tax refunds to boost growth by 0.4% in first half of 2026, with fading impact

● Federal deficit to increase by 0.8% due to tax cuts and spending

● Fed interest rates to remain higher than otherwise, dampening GDP growth impact

The Trump administration's mammoth fiscal legislation will boost economic growth next year, but the impact will be partially undercut by Federal Reserve interest rates kept higher than they would be otherwise, a former top Fed researcher concluded in a new analysis.

The federal deficit, meanwhile, will be even larger than the gain in gross domestic product.

John Roberts, former deputy associate director of the Fed's research division and now a special advisor to Evercore ISI, wrote in an analysis of the Trump legislation known as the "One Big Beautiful Bill" that the arrival of perhaps $100 billion in extra refunds early next year will help lift economic growth by about four-tenths of a percentage point in the first half of the year.

The legislation exempted some overtime and tipped income from taxes and included other tax breaks.

The GDP impact will fade fast, however, and for the full year growth will be about 0.32 percentage points higher than it would have been otherwise, Roberts found using the Fed's internally developed and publicly available FRB/US model of the economy. Next year's deficit, meanwhile, will grow by eight-tenths of a percentage point as a result of the tax cuts and higher spending on defense and border protection.

The slowing impact on growth is partly due to the nature of consumer behavior - the extra money is likely to be spent quickly by the households who intend to spend it at all - and partly due to the Federal Reserve reducing its benchmark policy rate less than it would otherwise due to faster economic growth that leads to slightly higher inflation and a slightly lower unemployment rate.

"The model suggests that rates should be roughly a quarter point higher at the end of 2026 than would have been appropriate in the absence of One BBB stimulus – so for instance, one cut if two would otherwise have been warranted," Roberts wrote. "In response to the stronger economy, interest rates are higher and those higher interest ratesdampen the increase in GDP" by about half.

Roberts' findings illustrate the type of considerations the Fed will be debating at the December 9-10 meeting, with the implications of changed tax policy factoring into the outlook for next year. Officials already are divided over whether further rate cuts are needed now, while President Donald Trump continued to demand lower rates.

Source: Reuters

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Adam

Cryptocurrency

Bitcoin Stalls at $92K as Zcash Defies Market Weakness

The crypto market fluctuated slightly over the past day, ranging from a low of $3.02 trillion before the publication of the FOMC minutes and Nvidia’s earnings, to a peak of $3.16 trillion in the middle of the Asian session. However, it has now fallen back to $3.13 trillion, remaining almost unchanged for the day. The cryptocurrency market remains pessimistic, reacting eagerly to negative news and quickly deflating on positive news.

Bitcoin is trading just above $92K at the start of the day on Thursday. It has been hovering around this level for the last four days, but the last ten days have seen lower local lows (falling to $88.5K at the end of the day on Wednesday) and local highs, indicating a very aggressive sell-off. In such conditions, it is only a matter of days before the bears find stop-out levels, triggering a self-sustaining avalanche of sell-offs.

ZEC remains a standout in the crypto market. The coin quickly recovered to the multi-year highs of $700 set earlier this month. This is quite impressive, considering the retreat of Bitcoin, which affects the entire crypto market. At the same time, we are wary of this growth, given its difficult legacy, as in previous bull markets, the rise of Zcash was a harbinger of the end.

Crypto News

The inflow into spot Solana ETFs in the US has continued for 16 consecutive trading sessions. During this time, $420.4 million has been invested in the funds. Canary’s recently launched XRP ETF in the US is also performing well, with an inflow of $276.8 million over three trading sessions; however, the bulk of the investment occurred on the first day of trading.

On November 18th, trading commenced on Solana-based spot exchange-traded funds from Fidelity (FSOL) and Canary Capital (SOLC) on the NYSE Arca and Nasdaq exchanges, respectively. Thus, five Solana spot ETFs are now trading in the US.

Aggressive bullish bets on the Bitcoin options market have been replaced by ‘clearly bearish’ positions, reflecting investors’ concerns about the market correction continuing, notes CoinDesk analyst Omkar Godbole. Short-term put options with strikes of $84,000-80,000 prevail.

Some experts attribute the current decline in the crypto market to a liquidity shortage amid the US government shutdown, rather than fundamental factors such as outflows from ETFs or a decline in DAT company activity.

Source: fxempire

Risk Warnings and Disclaimers

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Adam

Economic

A relief rally lifted world stock markets on Thursday as investors cheered AI chip giant Nvidia's forecast-topping earnings, while the dollar hovered near a 6-month high as traders braced for delayed U.S. jobs data.

Asia's tech-heavy markets had led off the rally and Europe's top bourses bounded out of a 5-day losing streak after Nvidia (NVDA.O) CEO Jensen Huang shrugged off AI bubble concerns, touting blockbuster demand for its high tech-chips.

The remarks were backed by the world's most valuable company's forecast quarterly revenue well above Wall Street estimates, quelling some of the AI valuation fears that have triggered a $3 trillion rout in global markets over recent sessions.

"It's fair to say that Nvidia's results have completely changed the market mood and pushed out any bubble fears for another day," Deutsche Bank strategist, Jim Reid, said.

That sentiment was echoed in major regional markets.

Europe's tech indexes (.SX8P) climbed 1.8%, with Infineon (IFXGn.DE), and ASML (ASML.AS), gaining 2.8% each and AI equipment makers Schneider Electric (SCHN.PA), and Siemens Energy (ENR1n.DE), up 2% and 4%, respectively.

Asia's gains had cooled slightly as the day progressed, but Tokyo's Nikkei 225 (.N225), still finished up a hefty 2.6%, Korean stocks (.KS11), jumped 1.9%, and Taiwan (.TWII), rallied 3.2% as its big chipmaker TSMC (2330.TW) leapt more than 4%.

Nasdaq and S&P 500 futures were up 1.7% and 1.3% too. Wall Street had already snapped a four-day losing streak on Wednesday before Nvidia's earnings release as investors positioned for a bounce.

The rebound was given additional impetus too by a Reuters report that the U.S. might delay long-promised semiconductor tariffs to help ease tensions with China.

Focus turns to US jobs data as Nvidia blows away bubble fears_1

This line chart shows Nvidia's share performance over the years

YEN STIMULUS STRESS

Currency and bond market traders were also assessing news that Japan's Prime Minister Sanae Takaichi's administration is reportedly preparing to pass a stimulus package that would be the country's biggest since the COVID-19 pandemic.

Japan's government bonds sold off sharply, with yields surging to record highs. The yen sagged to 157.60 , its weakest level in ten months, having also just set a record low against the euro . /FRX

The currency has weakened steadily since Takaichi was elected leader of her party, losing more than 6% of its value on unease about the scale of borrowing needed to fund her stimulus plans.

"It is going to be a crucial session going into the weekend to see if they (Japanese policymakers) can stop the bleeding here," Saxo Bank's FX strategist John Hardy said, likening the situation to the "ugly" rout on the pound in 2022 when the then Liz Truss government floated an unfunded spending drive.

The U.S. dollar index (.DXY) , which tracks the greenback's strength against a basket of six major peers, advanced 0.2% to 100.25, hovering close to a 6-month high.

The yield on benchmark 10-year Treasury notes edged up 1.1 basis points to 4.1406% compared with its U.S. close of 4.131% on Wednesday.

DELAYED JOBS DATA

Traders are now awaiting the release of September's delayed jobs report, due later in the global day, to provide clues on the Federal Reserve's next move.

Minutes from the Fed's October meeting released on Wednesday showed it cut interest rates even as policymakers cautioned that doing so could risk entrenched inflation and a loss of public trust in the U.S. central bank.

Fed funds futures are pricing an implied 33% probability of a 25-basis-point cut at the next meeting on December 10, down from a 50% chance a day earlier, according to the CME Group's FedWatch tool.

An updated schedule for the release of the November jobs report, now delayed until December 16, is behind the move, said Gavin Friend, senior markets strategist at National Australia Bank in London.

"That's six days after the December FOMC meeting, and that's why the 12 or 13 basis points of rate cuts that were priced in for December, 50% or so, has been immediately evaporated," he said on a podcast. From the market's perspective, he said, the data fog "plays to the Fed's messaging that 'we need to pause'."

Against the dollar, the euro was 0.2% weaker on the day at $1.1520, while in commodity markets Brent crude inched up to $63.6 per barrel having fallen over 2% on Wednesday as markets assessed the latest U.S. proposals to end the war in Ukraine and prepared for a U.S. deadline to cease operations with two major Russian oil firms.

Cryptocurrencies retraced some of their recent heavy selloffs too, with bitcoin up 1.8% at just over $92,200 and ether 1.5% higher at $3,033.

Precious metals markets were choppy, with spot gold last down 0.4% at $4,064.04 after earlier rising as much as 0.7%.

Source: reuters

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Justin

Central Bank

Odds of a December rate cut remained low following the release of delayed jobs data.

Markets were last pricing about a 35% chance of a quarter-point cut from the Federal Reserve next month, according to the CME FedWatch Tool. That is higher than the 30% likelihood priced in during the prior session, but remains weak. The tool used fed funds futures trading to calculate the odds.

The target rate is currently at 3.75% to 4.00%.

Those expectations held steady after the release of the September jobs data, the first nonfarm payrolls report investors have seen since the government shutdown. The report gave an uneven picture of the U.S. labor market. The U.S. economy added 119,000 jobs in September, a headline number that blew away expectations for 50,000 jobs added, according to economists polled by Dow Jones.

However, the unemployment rate showed unexpected weakness, rising to 4.4% from 4.3%. The new level is the highest level it's been since October 2021.

"All those numbers suggest an economy that's still hanging in there. Not a dramatic move one way or the other," Former Federal Reserve Vice Chairman Roger Ferguson told CNBC's "Squawk Box" on Thursday. "People should take note of the slight uptick in the unemployment rate, but labor force participation still looks pretty strong, average hourly earnings certainly looks strong, or strong enough. And so, I don't think this sort of tilts the cut decision much one way or the other."

To be sure, some investors are hopeful that weakness in the unemployment rate means a December rate cut remains on the table. The level is closely watched by Fed policymakers, more so than the headline number, and is additionally troubling given that a shrinking labor pool, given the rise in immigration crackdowns, theoretically would keep the job market tight.

"A December cut remains possible given continued labor market softness as expressed by the unemployment rate," wrote Kay Haigh, global co-head of fixed income and liquidity solutions at Goldman Sachs Asset Management. "Weak hard data and close-to-target inflation look set to drive policy going forward, despite recent hawkish noises."

"The setup is in place for Powell to continue his risk-management approach to the labor market before his term as Chair expires in May," Haigh continued.